Question

5. In many countries, governments set the fares for taxi rides. The prices for taxis in

safe neighbourhoods are the same as for those in dangerous neighbourhoods. Where is it

easier to find a cab, and why? If taxi price controls were eliminated, what would happen

to the price and quantity of taxi rides in dangerous neighbourhoods?

Answer 1

When price for taxi is same in both safe and dangerous neighborhood then it is easier to find a taxi in safe neighborhood because taxi drivers will prefer to drive in safe area. To drive in dangerous neighborhood, they need to be paid higher price to choose risky option.

When price controls are eliminated price of taxi will be higher in dangerous neighborhood because taxi drivers will need compensating wage differential to work in dangerous jobs.

Answer 2

When the government sets prices, it can either be a price ceiling or a price floor. When the government sets prices that are below the equilibrium price, it is known as the price ceiling and when it is set above the equilibrium price, it is known as the price floor.

In the given case, the government has imposed a set price on cab fares. It is important to note that dangerous neighbourhoods have more risk for the cab and the cab drivers. Therefore, when a price ceiling is imposed, the cabs prefer to stay in the safe neighbourhood than the dangerous neighbourhood. The safe neighbourhood gives the same fares at a lower level of risk than the dangerous neighbourhood. This causes higher supply of cabs in the safe neighbourhood and lower supply of cabs in the dangerous neighbourhood. Therefore, it is easier to find a cab in the safe neighbourhood.

When the price controls are eliminated, the price of cabs in the dangerous neighbourhood surges higher so that it matches the risk of driving through the dangerous neighbourhood. As prices surge higher in the dangerous neighbourhood, the supply of cabs increases as cab drivers find it more profitable to venture into the dangerous neighbourhood and get higher fares.

However, with the surge in prices in the dangerous neighbourhood, consumers are less willing to take a cab and potentially look for other means of transportation. Therefore, an increase in fares is associated with higher supply of cabs in the dangerous neighbourhood, but potentially lower demand due to the price factor.

Answer 3

The safe neighborhood will be easier to find the taxi because the place is safer and people will be more willing to visit that place. As the price of the cab is same in all the markets safe and unsafe it will lead to people visiting safer side more comfortably.

If the price control was eliminated the price of the unsafe areas will increase as the cab driver face considerable risk of various crime while picking a commuter from the unsafe zone, they would like to increase the price and manage the risk.

Answer 4

When price for taxi is same in both safe and dangerous neighborhood then it is easier to find a taxi in safe neighborhood because taxi drivers will prefer to drive in safe area. To drive in dangerous neighborhood, they need to be paid higher price to choose risky option.

When price controls are eliminated price of taxi will be higher in dangerous neighborhood because taxi drivers will need compensating wage differential to work in dangerous jobs.